Pet issue: debt and finanace

There are lots of areas regarding politics and the economy where my mom and I disagree. But some common ground we share is regarding the U.S. public/government debt. It’s pretty scary. Click here for a great set of graphics that illustrate the magnitude of the United States public debt.

We have all this debt because there is a fundamental disconnect between what we want from our government and what we’re willing (collectively) to pay in taxes. Here is a video that has a decent explanation. My mom sent me the video…and here’s how I responded:

What [the video] says is basically right on target from my perspective, with the exception of the comparisons to Greece. Thank goodness we’re not poor Greece. The key difference is that the U.S. dollar is the world’s “reserve currency”…it’s the most trusted currency in the world, people (oil countries, the Chinese, large international businesses) are comfortable holding it…and comfortable holding U.S. debt (government bonds), too. This allows us to get away with all kinds of things that Greece can’t do (see below). (Greece is also hobbled by being financially tied to the rest of the Euro zone…what would be good monetary policy to help Greece with its problems is not good policy for Germany, so the Germans (and Finns) won’t let them do it).

So, bottom line: the debt problem is real, the consequences described in the video are not so immediate…and THAT’S part of the problem: Greece was able to put off the day of reckoning for a short while (as was Spain, Ireland, etc.), but we can put it off for a long while…but that doesn’t mean it’s not there…some day, there will be a reckoning of some sort

I think it’s already too late. We are not going to pay back the $16 trillion…there’s just no way we can muster that kind of political courage, have that much decline in our standard of living. (Although how much decline there would be is debatable…we’d have to pay a lot of money to a lot of poeple [who hold our bonds], but they would be getting all that money, and they would spend it or invest it…so it’s really just a transfer of wealth, not a loss). I see two possible broad, not mutually exclusive scenarios, somewhere in the hopefully distant future. First, we face some kind of political/military decline, so that someone else in the world controls the purse strings, and they demand that we get our fiscal house in order before lending us more money…just like the situation the Greeks face: a lack of internal discipline means the discipline must be imposed externally. I suspect our military and political decline is a ways off (but who knows). The second scenario is that we inflate the debt away: just start printing money so that prices and wages go up, the currency loses purchasing power, and the huge debt we have becomes trivial. This would be ruinous to the economy (slow ruin if we do it slowly, quick and massive ruin if we do it quickly). But it would wipe the slate clean. At the height of its recent hyperinflation, Zimbabwe was printing $100 billion bills…if we had those in U.S. dollars, we could pay of the U.S. debt with 160 bills! Inflation is essentially a hidden tax: the government prints money, so that the money everyone holds loses value…a transfer of value from the people to the government, just like a tax. Not all Americans realize this, but enough wealthy, powerful people do, and they would lose a lot from it, so there would be a lot of resistance to hyperinflation ever happening in the U.S. But if somehow the U.S were to get an entrenched populist government (say, the Tea Party and the Occupy movements see their common cause and join forces), a huge inflation tax to pay back the debt could be conceivable.

The big question is when and how the day of reckoning will come. The day of reckoning is when lenders fear that the U.S. won’t be able to pay back debt, so they stop lending. BUT: the lenders are only looking at the new, relatively short-term loans (bonds)…the question the lender has is “Will the U.S. be able to pay back this 1 year (or 3 year, or whatever) bond IN 1 YEAR? As long as they think the U.S. is going to be around and paying its debts in 1 year, they’re comfortable lending the money (by buying the bond). So the whole thing keeps rolling forward. Also good to keep in mind regarding this situation is that investors have to put their money *somewhere*…investors have a tremendous impetus to put their money *somewhere* that pays a little interest, rather than keeping it in a vault. If they gotta loan the money to someone, the U.S. government is still the safest bet in the world. Greece, of course, never had it like this. The U.S. is essentially getting paid for its economic and political stability…which we achieved by a mixture of astoundingly good political ideas (Washington, Jefferson, Madison, and their heirs), backbone (Lincoln, FDR, Nixon, etc.) and a lot of blood spilled (WWII, etc).

(Now, if the government starts kicking in some inflation, the U.S. will no longer be such a safe bet, and people will stop loaning us money. So this gives serious pause to anyone thinking the inflation route is an easy one. Huge irony: the only way we can keep getting more of the debt to which we are addicted is to avoid serious inflation…but serious inflation is the only realistic [if unpalatable] way we can eliminate our existing debt.)

But we could try to make it no worse, stop contributing to the problem. And there’s a simple and pretty fair way to do it. (It will be just as painful as the video suggests…they key bit is simplicity and fairness.) Cut government spending and raise taxes equally…one government dollar cut for every one dollar in additional taxes. Every reasonable commentator (for example, the editors of The Economist, a fairly academic and conservative and news magazine) says we must do both. I’m not sure, but I *think* this is what Obama and the leader of the Congressional Republicans hammered out last summer…then walked away from at the last moment, because both of their bases were unwilling to compromise. Too bad, a moment of courage and leadership, vanished.

It IS the politicians’ fault…and thus ours. We want a certain level of government services (social programs, defense, etc.) but we’re not willing to pay the taxes to get it…or just as equally, we want a certain level of taxes, and aren’t willing to live with the low level of government services that would result. (One can say “cut government waste to solve the problem!”, but the scale of debt is vastly beyond what could be saved by making government less wasteful. More broadly, cutting waste has proven nearly impossible to do…we should stay vigilant against waste, but we have to accept that government won’t do things as efficiently as the private sector, but that there are things government needs to do that the private sector can’t or shouldn’t do.). There’s plenty of this in the private sector, too, for businesses that are big enough to get away with it. Detroit got into so much trouble because the CEOs (and thus shareholders) cut deals with the unions in the 60s and 70s to give them lots of deferred compensation, i.e. pensions. The automakers got the labor on the cheap (relatively speaking!), heaping huge burdens on the CEOs (and shareholders and unions) of today. (Of course, who could foresee both the tremendous global competition in autos that would eliminate all the largesse in the industry, plus the skyrocketing health care costs that would make the pensions such a huge burden. Economic models usually assume everyone has perfect information and foresight into an infinite future [not kidding, this really is the assumption]…but perfect information and foresight were the case, we’d never have recessions.) But back to the politicians: one politician says: X government services and low taxes, another politician says X government services and higher taxes…who is going to get the votes?

Well, that turned into a much longer response than I had intended. To a degree, it’s pretty complicated…but in other senses, it’s pretty simple.I think I stayed pretty nonideological.